Chapter 4 Outline |
IV. OPEC: A FEW SELLERS ACTING LIKE A MONOPOLY |
A. Cartel Formation |
| 1. Three variables are important in determining the success of forming and maintaining a cartel. |
| a. The cartel must reach an agreement that all producers will abide by. |
| | 1. This agreement stipulates the total output to be produced by the cartel and the division of production among the members. |
| b. The canel must continue to cooperate and come to new agreements as conditions change. |
| c. The agreement must be enforced. |
| | 1. Because it is very profitable for canel members to cheat on the original agreement, there must be some method of enforcement. |
B. The Determinants of Cartel Success |
| 1. The fewer the number of firms and the more similar they are, the easier it is to form and operate a cartel. |
| a. As the number of firms increases, it becomes more difficult to include all
the firms in the industry. |
| b. As the number of firms increases, it becomes more difficult to detect
cheating on the agreement. |
| 2. If firms are not similar, it becomes more difficult to determine the division of output and profits. |
C. Problems of the OPEC Cartel |
| 1. There are three factors accounting for the serious problems encountered by the OPEC canel. |
| a. There is a large number of members, as well as several nonmember petroleum producers. |
| | 1. The existence of large profits attracted entry to the industry and drove the price of petroleum down. |
| b. The members are dissnnilar in that they have different and conflicting goals. |
| | 1. Countries with small reserves want higher prices now, while countries with large reserves are more concerned with long-run profits. |
| c. The demand for petroleum is more elastic in the long run. |
| | 1. Over time consumers have made adjustments to the higher OPEC price. |